Rally Attributed to Housing Starts 08-17-2010

Cusick’s Corner
The market held up again into the After Hours. Some market watchers are attributing the rally today on improved month-over-month Housing starts numbers, but remember that June was one of the lowest in over a year, so I would not put much emphasis on those results. If the market can break upside resistance of 1100 on the SPX, the bulls could have some steam to challenge the beginning of the month highs. One note, PPI data showed today that inflation is in check and that global deflation is more of a concern at this stage in the economic cycle (it may be worth looking back at today’s Midday and read up on the defensive sectors mentioned). Crude inventories are out tomorrow at 11:30 ET which could further pressure crude. See you Midday.

Stocks rallied Tuesday morning with help from earnings and merger news. Home Depot (HD) is leading the Dow Jones Industrial Average after the home improvement retailer reported better than expected profits. The world’s largest retailer, Walmart (WMT), also moved higher on earnings. Meanwhile, two mergers were announced: BHP Billiton is making a $39 billion bid for Potash (POT) and Reynolds said it was looking to buy Pactiv (PTV). The day’s economic news was mixed. Data released early showed July housing starts improving less than expected (546K vs. 555K consensus) and separately, an in-line reading from the Producer Price Index (.2 percent) for July. Separate data released later showed industrial production up a better than expected 1 percent last month (vs. .6 percent consensus). At the end of the day, the focus seemed to be on the day’s stock news and the Dow Jones Industrial Average sported a 104-point gain. The NASDAQ closed up 28.

Bullish Flow
Las Vegas Sands (LVS) saw heavy trading as shares notched a new 52-week high Tuesday. LVS moved up to $30.29 early and was recently up $1.05 to $29.91 amid the broad market rally and after Mad Money’s Jim Cramer said late Monday that he’s bullish on the casino operator. Meanwhile, options volume is running 2.5X the average daily, with 85,000 calls and 32,000 puts traded on the session. The August 30 and 31 calls are the most actives with 23,900 and 8,300 traded respectively. Looks like some short-term speculators are buying August call options and looking to play the new bullish momentum in the stock. August options expire at the end of this week.

Bullish flow was also detected in Intrepid Potash (IPI), Exxon Mobile (XOM), and BMC.

Bearish Flow
Scripps Networks Interactive (SNI) saw much more action than usual Tuesday. Shares of the Cincinnati cable television company are up 71 cents to $42.71 and 7,765 puts traded so far, which is 35X the normal and is also noteworthy because zero call options have traded in the name. The focus is on December 35 and 40 puts which have traded 3060X and 1520X respectively. With more than 95 percent of the volume traded at the asking price, the action looks like put buying and perhaps hedging activity on concerns about the outlook for the share price from now through mid-December.

Bearish flow also picked up in Pfizer (PFE), Gannett (GCI), and MEMC (WFR).

Index Trading
The CBOE Volatility Index (.VIX) is under pressure as the S&P 500 Index (.SPX) rallies 15.7 points Tuesday. After a five-day 20.7 percent rally last week, the market’s “fear gauge” is down 10.3 percent since Friday. Trading in VIX options is brisk. 129K calls and 237K puts traded so far. The top trades are part of spread, in which and investor sold 50,000 August 25 puts at 65 cents to buy 50,000 September 24 puts at 75 cents each. This spread is probably a roll of VIX puts from one month to the next. VIX options expire on Wednesdays. In the case of August options, the expiration is tomorrow and today is the last day to trade before the contracts expire.

ETF Trading
Proshares Ultra Short Bond Fund (TBT) is up 32 cents to $32.87, as stocks rally and bonds lose some of their “flight-to-safety” bid. Treasury bonds have performed well lately and yields, which move opposite to price, have been falling amid weak economic data and increasing volatility across global equity markets. However, Tuesday, the benchmark ten-year Treasury lost 19/32nd and its yield rose to 2.65 from 2.57 percent on the day. TBT, which is a leveraged fund designed to move opposite to bond prices, is moving higher along with yields. Meanwhile, in the options market, 89,000 calls traded on the fund. Some investors have been buying these calls on concern that bond prices might give back some recent gains and that bond yields will begin to rise.